The burning questions we’ve been asked recently: Offboarding Edition

As a startup, layoffs are a difficult but sometimes necessary part of the growth process. But your company culture doesn’t stop when you part ways with team members. It’s critical to ensure a smooth offboarding process for any team members affected by restructuring changes. This not only shows respect for their contributions to the company, but also helps maintain a positive reputation and keep retained team members engaged and motivated.

This topic is getting a lot of attention right now, for good reason. So here we’ll round up the key offboarding questions we’ve been asked by customers and other stakeholders recently. Whether you’re a seasoned HR professional or a founder navigating layoffs for the first time, this guide is here to help.

Question 1: What happens to employees’ equity when they’re offboarded?

When an employee leaves a company, their stock options will typically be subject to the terms of the stock option plan and the option agreement. Unfortunately, there is no standardization from company to company – and even from team member to team member – when it comes to employee stock options.

Depending on the terms of the plan, and the agreement, employees usually have a certain amount of time to exercise their options on leaving the business. This timeframe might be relatively generous – you might have 5 or 10 years to decide whether you want to exercise your options – but some companies can impose quite restrictive terms on employees, giving them 90 days or even as little as 30 days to exercise their share options. In this event you would have a matter of weeks to make a potentially complex financial decision, evaluating whether you want to take the opportunity to convert your options into shares and pay the money required to do so.

But what about if you’ve been with the company for a long time, and have turned some or all of your share options into shares? Shareholding employees may be asked to sign a stock repurchase agreement or a stock cancellation agreement, in which the employee agrees to sell their vested shares back to the company at a predetermined price, which is usually the fair market value of the shares at the time of the repurchase. The company would then cancel those shares, effectively returning them to the company's pool of available shares.

THEN, we need to talk about good leavers and bad leavers. Depending on your circumstances, you might be classed as a good leaver, who retains their shares and options on leaving the business, or a bad leaver, who automatically forfeits their equity when they move on. Again, there is no standard practice across companies so it’s worth looking into this. For a deeper dive into who qualifies, check out our longer post on leaver clauses.

So are you an employee reading this? Lesson 1: re-read your employment contract and share option plan agreement! If needed, you should consult legal counsel or a tax advisor for a better understanding of the options and the process.

Question 2: How do we reduce the admin burden when offboarding employees?

While layoffs are concerning and stressful for affected team members, they can also create a bunch of new work for HR, operations, legal and people teams. In fact, concerns around the amount of admin can be so extreme that some companies are disincentivized from setting up an equity scheme in the first place.

In particular, admin efforts are usually focused on the many share option grants belonging to the different employees that are affected. Without software, every share option grant has to be manually terminated, which means lots of tedious actions in documents. Software like Ledgy lets users in HR, ops or legal teams take bulk actions for groups of people, saving valuable time. (Take a closer look at how Ledgy helps lighten the load by automating time-consuming offboarding processes.)

But after employees have left the company, their voice as shareholders still needs to be taken into account. One tactic to manage shareholders for companies is to introduce minority shareholder representation. This can be based on a predefined threshold, below which the shareholders agree to be represented by an appointed representative. The representative gathers inputs from the minority shareholders (and if they don’t respond in due time, they agree to go with the collective stance that the minority investor group has agreed upon based on their pro-rata voting power). This approach eases the burden of communication and administration from a company perspective.